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The Journal of Law, Economics, and Organization V19 I1
© 2003 Oxford University Press
Original Article |
Why Are the Levels of Control (So) Different in German and U.K. Companies? Evidence from Initial Public Offerings
University of Manchester Institute of Science and Technology (UMIST)
Tilburg University
Abstract
We analyze why the control of listed German and U.K. companies is so different. As shareholders in Germany are less protected and control is less expensive, German investors prefer controlling stakes. We also focus on economic factors such as profitability, risk, and growth to predict the probability of occurrence of different states of control six years after the flotation. Large U.K. companies become widely held, whereas in large German firms new shareholders control significantly larger stakes. Wealth constraints become binding for U.K. shareholders, whereas German shareholders can avoid this by using pyramids. We find substantial differences between a takeover by a concentrated shareholder and one by a widely held company. For the United Kingdom, the probability of the former increases when the company is risky, small, and poorly performing. Conversely, the latter is more likely when the target is large, fast growing, and profitable. Poor performance and high risk require control and monitoring by a concentrated shareholder. Conversely, high growth and profitability attract widely held companies. Founders are less inclined to dilute their stake to retain private benefits of control. When German firms are profitable and risky, control is likely to go to a concentrated shareholder, but growth and low profitability increase the probability of a control acquisition by a widely held firm.